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Friday, November 18, 2011

Fall 2011 issue of Journal of Economic Perspectives

The Fall 2011 issue of my own Journal of Economic Perspectives is now available on-line. As has been true for several years now, all of the articles as well as archives going back to the late 1990s are freely available to all, courtesy of the American Economic Association. I may well do some posting about individual articles in the next week or so. But for now, here is the Table of Contents, with titles and authors, abstracts, and also links to the articles and on-line appendices.

Neuroeconomics combines methods and theories from neuroscience psychology, economics, and computer science in an effort to produce detailed computational and neurobiological accounts of the decision-making process that can serve as a common foundation for understanding human behavior across the natural and social sciences. Because neuroeconomics is a young discipline, a sufficiently sound structural model of how the brain makes choices is not yet available. However, the contours of such a computational model are beginning to arise; and, given the rapid progress, there is reason to be hopeful that the field will eventually put together a satisfactory structural model. This paper has two goals: First, we provide an overview of what has been learned about how the brain makes choices in two types of situations: simple choices among small numbers of familiar stimuli (like choosing between an apple or an orange), and more complex choices involving tradeoffs between immediate and future consequences (like eating a healthy apple or a less-healthy chocolate cake). Second, we show that, even at this early stage, insights with important implications for economics have already been gained.

(3) It's about Space, It's about Time, Neuroeconomics and the Brain Sublime

Marieke van Rooij and Guy Van Orden

Neuroeconomics has investigated which regions of the brain are associated with the factors contributing to economic decision making, emphasizing the position in space of brain areas associated with the factors of decision making—cognitive or emotive, rational or irrational. An alternative view of the brain has given priority to time over space, investigating the temporal patterns of brain dynamics to determine the nature of the brain's intrinsic dynamics, how its various activities change over time. These two ways of approaching the brain are contrasted in this essay to gauge the contemporary status of neuroeconomics.

The costs of comprehensively genotyping human subjects have fallen to the point where major funding bodies, even in the social sciences, are beginning to incorporate genetic and biological markers into major social surveys. How, if at all, should economists use and combine molecular genetic and economic data from these surveys? What challenges arise when analyzing genetically informative data? To illustrate, we present results from a "genome-wide association study" of educational attainment. We use a sample of 7,500 individuals from the Framingham Heart Study; our dataset contains over 360,000 genetic markers per person. We get some initially promising results linking genetic markers to educational attainment, but these fail to replicate in a second large sample of 9,500 people from the Rotterdam Study. Unfortunately such failure is typical in molecular genetic studies of this type, so the example is also cautionary. We discuss a number of methodological challenges that face researchers who use molecular genetics to reliably identify genetic associates of economic traits. Our overall assessment is cautiously optimistic: this new data source has potential in economics. But researchers and consumers of the genoeconomic literature should be wary of the pitfalls, most notably the difficulty of doing reliable inference when faced with multiple hypothesis problems on a scale never before encountered in social science.

Someone reading empirical research relating human genetics to personal outcomes must be careful to distinguish two types of work: An old literature on heritability attempts to decompose cross-sectional variation in observed outcomes into unobservable genetic and environmental components. A new literature measures specific genes and uses them as observed covariates when predicting outcomes. I will discuss these two types of work in terms of how they may inform social policy. I will argue that research on heritability is fundamentally uninformative for policy analysis, but make a cautious argument that research using genes as covariates is potentially informative.

This paper presents evidence on the resources available to households as they enter retirement. It draws heavily on data collected by the Health and Retirement Study. We calculate the "potential additional annuity income" that households could purchase, given their holdings of non-annuitized financial assets at the start of retirement. We also consider the role of housing equity in the portfolios of retirement-age households and explore the extent to which households draw down housing equity and financial assets as they age. Because home equity is often conserved until very late in life, for many households it may provide some insurance against the risk of living longer than expected. Finally, we consider how our findings bear on a number of policy issues, such as the role for annuity defaults in retirement saving plans.

Long-term care expenditures constitute one of the largest uninsured financial risks facing the elderly in the United States and thus play a central role in determining the retirement security of elderly Americans. In this essay, we begin by providing some background on the nature and extent of long-term care expenditures and insurance against those expenditures, emphasizing in particular the large and variable nature of the expenditures and the extreme paucity of private insurance coverage. We then provide some detail on the nature of the private long-term care insurance market and the available evidence on the reasons for its small size, including private market imperfections and factors that limit the demand for such insurance. We highlight how the availability of public long-term care insurance through Medicaid is an important factor suppressing the market for private long-term care insurance. In the final section, we describe and discuss recent long-term care insurance public policy initiatives at both the state and federal level.

In his Nobel Prize acceptance speech given in 1985, Franco Modigliani drew attention to the "annuitization puzzle": that annuity contracts, other than pensions through group insurance, are extremely rare. Rational choice theory predicts that households will find annuities attractive at the onset of retirement because they address the risk of outliving one's income, but in fact, relatively few of those facing retirement choose to annuitize a substantial portion of their wealth. There is now a substantial literature on the behavioral economics of retirement saving, which has stressed that both behavioral and institutional factors play an important role in determining a household's saving accumulations. Self-control problems, inertia, and a lack of financial sophistication inhibit some households from providing an adequate retirement nest egg. However, interventions such as automatic enrollment and automatic escalation of saving over time as wages rise (the "save more tomorrow" plan) have shown success in overcoming these obstacles. We will show that the same behavioral and institutional factors that help explain savings behavior are also important in understanding 1) how families handle the process of decumulation once retirement commences and 2) why there seems to be so little demand to annuitize wealth at retirement.

(9) The Case for a Progressive Tax: From Basic Research to Policy Recommendations

Peter Diamond and Emmanuel Saez

This paper presents the case for tax progressivity based on recent results in optimal tax theory. We consider the optimal progressivity of earnings taxation and whether capital income should be taxed. We critically discuss the academic research on these topics and when and how the results can be used for policy recommendations. We argue that a result from basic research is relevant for policy only if 1) it is based on economic mechanisms that are empirically relevant and first order to the problem, 2) it is reasonably robust to changes in the modeling assumptions, and 3) the policy prescription is implementable (i.e, is socially acceptable and not too complex). We obtain three policy recommendations from basic research that satisfy these criteria reasonably well. First, very high earners should be subject to high and rising marginal tax rates on earnings. Second, low-income families should be encouraged to work with earnings subsidies, which should then be phased-out with high implicit marginal tax rates. Third, capital income should be taxed. We explain why the famous zero marginal tax rate result for the top earner in the Mirrlees model and the zero capital income tax rate results of Chamley and Judd, and Atkinson and Stiglitz are not policy relevant in our view.

First we discuss how extrinsic incentives may come into conflict with other motivations. For example, monetary incentives from principals may change how tasks are perceived by agents, with negative effects on behavior. In other cases, incentives might have the desired effects in the short term, but they still weaken intrinsic motivations. To put it in concrete terms, an incentive for a child to learn to read might achieve that goal in the short term, but then be counterproductive as an incentive for students to enjoy reading and seek it out over their lifetimes. Next we examine the research literature on three important examples in which monetary incentives have been used in a nonemployment context to foster the desired behavior: education; increasing contributions to public goods; and helping people change their lifestyles, particularly with regard to smoking and exercise. The conclusion sums up some lessons on when extrinsic incentives are more or less likely to alter such behaviors in the desired directions.

In a 1966 article in the American Economic Review, Harvey Leibenstein introduced the concept of "X-efficiency": the gap between ideal allocative efficiency and actually existing efficiency. Leibenstein insisted that absent strong competitive pressure, firms are unlikely to use their resources efficiently, and he suggested that X-efficiency is pervasive. Leibenstein, of course, was attacking a fundamental economic assumption: that firms minimize costs. The X-efficiency article created a firestorm of criticism. At the forefront of Leibenstein's powerful critics was George Stigler, who was very protective of classical price theory. In terms of rhetorical success, Stigler's combination of brilliance and bluster mostly carried the day. While Leibenstein's response to Stigler was well reasoned, it never resonated with many economists, and Leibenstein remains undeservedly underappreciated. Leibenstein's challenge is as relevant today as it ever was.